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SEC Staff Review of Common Financial Reporting Issues Facing Smaller Issuers Wayne Carnall, Chief Accountant Wayne Carnall, Chief Accountant Steven Jacobs, Associate Chief Accountant Steven Jacobs, Associate Chief Accountant Hugh West,

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SEC Staff Review of Common Financial Reporting Issues Facing Smaller Issuers

Wayne Carnall, Chief Accountant Wayne Carnall, Chief Accountant Steven Jacobs, Associate Chief Accountant Steven Jacobs, Associate Chief Accountant Hugh West, Accounting Branch Chief Hugh West, Accounting Branch Chief Mark Kronforst, Accounting Branch Chief Mark Kronforst, Accounting Branch Chief Kevin Woody, Accounting Branch Chief Kevin Woody, Accounting Branch Chief Angela Crane, Accounting Branch Chief Angela Crane, Accounting Branch Chief Kevin L. Vaughn, Accounting Branch Chief Kevin L. Vaughn, Accounting Branch Chief Joel Parker, Accounting Branch Chief Joel Parker, Accounting Branch Chief Brian Bhandari, Accounting Branch Chief Brian Bhandari, Accounting Branch Chief Division of Corporation Finance Division of Corporation Finance November 2008 November 2008

These slides were presented at the Forums on Auditing in the Small Business Environment hosted by the PCAOB during 2008. Participants were auditors from smaller registered public accounting firms and directors and financial executives of smaller public companies. The slides are intended to provide an overview of issues that the SEC Staff frequently encounters when reviewing filings for smaller public companies. 1

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Agenda Agenda

Overview

Recent Developm

Recent Develop ents ments

The Comment Letter Process

Financial Reporting Issues Frequently

Financial Reporting Issues Frequently Raised in Comment Letters Raised in Comment Letters

Management

Management’ ’s Report on Internal s Report on Internal Control over Financial Reporting* Control over Financial Reporting*

Resources

* Forums held in Chicago and Philadelphia in September and October, respectively included a second day attended only by directors and financial executives of smaller public companies. The slides covering management’s report on internal control

ver financial reporting (slides 38 thorugh 47) were only presented to those

participants. 2

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Disclaimer Disclaimer

The Securities and Exchange Commission, The Securities and Exchange Commission, as a matt as a mat er of policy, disclaims ter of policy, disclaims responsibility for any private publication or responsibility for any private publication or statement by any of its employees. statement by any of its employees. Therefore, the views expressed today are Therefore, the views expressed today are those of the speaker, and do not those of the speaker, and do not necessarily reflect the views of the necessarily reflect the views of the Commission or the other members of the Commission or the other members of the staff of the Commission. staff of the Commission.

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Overview Overview

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Overview Overview

Divisions and Offices Divisions and Offices

Four Divisions Corporation Finance Enforcement Investment Management Trading and Markets Eighteen Offices Chief Accountant (includes Interactive Disclosure) Compliance Inspections and Examinations Economic Analysis 15 Others

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Division of Corporation Finance Division of Corporation Finance (DCF) (DCF)

Mission Mission – – “ “To see that investors are provided with To see that investors are provided with material information in order to make informed material information in order to make informed investment decisions investment decisions — — both when a company both when a company initially offers its stock to the public and on a initially offers its stock to the public and on a regular basis as it continues to give information to regular basis as it continues to give information to the marketplace. the marketplace.” ”

Review the disclosure documents filed by pub Revie lic w the disclosure documents filed by public companies (including initial registrations) companies (including initial registrations) Provide interpretive assistance to co Provide mpanies on SEC interpretive assistance to companies on SEC rules and forms rules and forms Propose new and revised rules to th Propose ne e Commission w and revised rules to the Commission

Organization Organization

11 industry grou 11 i ps ndustry groups Support Offi Su ces pport Offices

The Division of Corporation Finance assists the Commission in executing its responsibility to oversee corporate disclosure of important information to the investing public. Corporations are required to comply with regulations pertaining to disclosure that must be made when stock is initially sold and then on a continuing and periodic basis. The Division's staff routinely reviews the disclosure documents filed by companies. The staff also provides companies with assistance interpreting the Commission's rules and recommends to the Commission new rules for adoption. The Division of Corporation Finance reviews documents that publiclyheld companies are required to file with the Commission. These documents disclose information about the companies' financial condition and business practices to help investors make informed investment decisions. Through the Division's review process, the staff checks to see if publiclyheld companies are meeting their disclosure requirements and seeks to improve the quality of the disclosure. Corporation Finance provides administrative interpretations of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Trust Indenture Act of 1939, and recommends regulations to implement these statutes. The Division's staff provides guidance and counseling to registrants, prospective registrants, and the public to help them comply with the law and related regulations. For example, a company might ask whether the offering of a particular security requires registration with the SEC. Corporation Finance would share its interpretation of the relevant securities regulations with the company and give its informal advice on compliance with the appropriate disclosure requirement. The Division uses noaction letters and interpretive letters to provide guidance on the regulations in a more formal manner. 6

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Division of Corporation Finance Division of Corporation Finance (DCF) (DCF)

Assistant Director Senior Assistant Chief Accountant Accounting Branch Chiefs (3) Staff Accountants Legal Branch Chief Special Counsel Legal Examiners Assistant Chief Accountant

From http://www.sec.gov/divisions/corpfin/cffilingreview.htm: The Division performs its primary review responsibilities through eleven offices staffed with approximately 80 percent of the Division’s employees. The members of these eleven offices have specialized industry, accounting, and disclosure expertise. The Division assigns filings by companies in a particular industry to one of the eleven Assistant Director Offices listed. The Division has staffed each office with 25 to 35 professionals, primarily accountants and lawyers. We show each company’s office assignment in EDGAR following the basic company information that precedes the company’s filing history. An Associate Director (Paul Belvin, James Daly, or Barry Summer) oversees each Assistant Director Office. The Deputy Director (Shelley Parratt) and Director (John White) oversee the entire filing review process. 7

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DCF DCF – – Chief Accountant Chief Accountant’ ’s Office s Office

Provides technical support to industry groups

Consultations from the Staff on technical matters Registrant’s request for reconsideration of Staff comments

May include OCA

Restatements

Pre-filing submissions

Interpretations of reporting requirements Waivers/accommodations of reporting requirements Interpretations on the application of GAAP (in conjunction with OCA)

Rulemaking impacting financial reporting

The Chief Accountant’s Office (“OCACF”) within the Division of Corporation Finance is a key support office for Disclosure Operations. OCACF directly supports Disclosure Operations by providing technical support to each of the industry groups. Each of the Associate Chief Accountants (“Associates”) serves at least

ne Assistant Director Office or Industry Group. The Industry Groups will consult with the

Associates on technical accounting and reporting matters identified during the course of a filing review. The Associate will work as a resource with the group to resolve issues that arise through the comment process. OCACF may also participate in issues identified through a filing review if the Registrant requests that the Staff reconsider the position taken in the comment process. Finally, OCACF will generally review all situations in which the Staff is requesting that a Registrant restate its financial statements to ensure consistency across the Division and thorough consideration. As appropriate, OCACF, may request assistance from OCA in any of the above situations. In addition, OCACF interacts directly with Registrants and their advisors on interpretive matters in addition to formal requests for accommodations or waivers. Registrants and their advisors can contact OCACF at 2025513400 for general interpretative questions or online at https://tts.sec.gov/cgibin/corp_fin_interpretive, but must submit written requests to the Chief Accountant for any formal view on an interpretive matter or waiver related to compliance with a rule. Requests for the staff to consider the registrant’s proposed application of GAAP for a particular issues should be submitted to OCA and OCACF will participate (see www.sec.gov/info/accountants/ocasubguidance.htm). OCACF also participates in the rulemaking process to the extent it impacts financial

reporting. For a clearer description of the rulemaking process, see

http://www.sec.gov/about/whatwedo.shtml#corpfin.

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Office of the Chief Accountant Office of the Chief Accountant

Carries out the day Carries out the day-

to-

day work to as

da si s st the Commissi st the Comm

n i
n n its

n y work to as i issi i its

versight role over the FASB, which the Commission has
versight role over the FASB, which the Commission has

designated as a private designated as a private-

sector accountin

sec g st g anda and rd s rd et e te t r tor accountin st a s t er Also carries out oversight resp Als

nsi
carries out oversight responsibilities related to the

related to the bilities PCAOB PCAOB Consults with registrants and auditors regarding th Consults with registrants and auditors regarding the applicatio application of accounting, auditing f accounting, auditing, and independenc ndependence n o , and i standards standards www.sec.gov/info/accountants/ocasubguidance.htm OCA and DCF work together closely OCA an

d DCF work together closely on: Consultations on certain technical matters relating to Co the nsultations on certain technical matters relating to the application of GA application of GAAP AP Rulemaking impacting financial reportin Ru g lemaking impacting financial reporting Consultations from registrant Co s nsultations from registrants z z Pre Pre-

clear

cl ance anc ear e z z Staff commen Staff comm ts ents

The Chief Accountant is principal adviser to the Commission on accounting and auditing

matters. The Office of the Chief Accountant assists the Commission in executing its

responsibility under the securities laws to establish accounting principles, and for

verseeing the private sector standardssetting process. The Office works closely with the

Financial Accounting Standards Board, to which the SEC has delegated authority for accounting standards setting, as well as the International Accounting Standards Board. In addition to its responsibility for accounting standards, the Commission is responsible for the approval or disapproval of auditing rules put forward by the Public Company Accounting Oversight Board, a privatesector regulator established by the SarbanesOxley Act to oversee the auditing profession. The Commission also has oversight responsibility for all of the activities of the PCAOB, including approval of its annual budget. To assist the Commission in the execution of these responsibilities, the Office of the Chief Accountant is the principal liaison with the PCAOB. The Office also consults with registrants and auditors

n a regular basis regarding the application of accounting and auditing standards and

financial disclosure requirements. Because of its expertise and ongoing involvement with questions concerning the financial books and records of public companies registered with the SEC, the Office of the Chief Accountant is often called upon to assist in addressing issues that arise in the context of Commission enforcement actions. 9

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Recent Developments Recent Developments

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Smaller Reporting Company Relief Smaller Reporting Company Relief and Simplification and Simplification

Effective date -- February 4, 2008 The reasons for the change are:

Expand eligibility to use scaled disclosure Reduce unnecessary complexity by aligning the

categories of “small business issuers” and “non- accelerated filers”

Simplify disclosure requirements by including

scaled disclosure requirements in Regulations S- K and S-X

Does not change the level of disclosure required in most cases

From the Small Entity Compliance Guide: The SEC has adopted a new system of disclosure rules for smaller companies filing periodic reports and registration statements. The new rules are effective February 4,

2008. They are scaled to reflect the characteristics and needs of smaller companies

and their investors. They replace the disclosure requirements formerly in the SEC’s Regulation SB, which applied to “small business issuers.” The “smaller reporting company” category includes companies that qualified as “small business issuers” before the new rules, as well as most companies that qualify as “nonaccelerated filers.” In general, companies that enter the system with less than $75 million in common equity public float qualify as smaller reporting

companies. Companies without a public float typically qualify if they have less than

$50 million in annual revenues upon entering the system. Under the new system, smaller reporting companies will prepare and file their SEC reports and registration statements using the same forms as other SEC reporting companies, though the information required to be disclosed may differ. Eventually, there will be no special “small business” forms like Forms 10KSB and SB2. Instead, smaller reporting companies will use standard forms like Forms 10K and S1 used by other companies. Regulation SX contains the SEC requirements for financial statements, while Regulation SK contains the nonfinancial disclosure

requirements. To locate the scaled disclosure requirements, smaller reporting

companies will refer to the special paragraphs labeled “smaller reporting companies” in Regulation SK. 11

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Smaller Reporting Company Relief Smaller Reporting Company Relief and Simplification and Simplification

Key Changes

New Threshold -- $75 million in public float

Revenues of $50 million if public float is zero

“A la Carte” Disclosures Financial statement requirements

Two years of audited balance sheets Interim filings must contain most recent year-end balance sheet Rule 3-05 amended to raise threshold at which only two years of financial statements are required from $25 million in revenues to $50 million in revenues

Eliminates use of SB forms

For the most part, the new rules did not change any existing requirements for smaller reporting companies. The only notable changes are as follows:

Two years of audited balance sheets are now required instead of one.
Interim filings must contain the balance sheet for the most recent yearend

in addition to the interim balance sheet.

Smaller reporting companies are no longer eligible to prepare a plan of
perations under Item 303 of Regulations SK in lieu of discussing their

results of operations. Smaller reporting companies may choose to comply with scaled or nonscaled financial and nonfinancial item requirements on an itembyitem basis in any one

filing. Where the smaller reporting company requirement is more rigorous,

however, the company must meet the more rigorous standard. Currently, the smaller reporting company requirements under Item 404 of Regulation SK are the only place where the scaled requirements can be more rigorous than the larger company standard. In addition, all registrants that have significant business acquisitions at a level greater than 50% may now exclude the earliest period if the acquired business had revenues less than $50 million in the most recent year as opposed to $25 million. This amendment was to be consistent with changes to the definition of a smaller reporting company. 12

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Smaller Reporting Company Relief Smaller Reporting Company Relief and Simplification and Simplification

Where can I find more information?

The final rule release --

http://www.sec.gov/rules/final/2007/33-8876.pdf

The Small Entity Compliance Guide --

http://www.sec.gov/info/smallbus/secg/smrepcosysguid. pdf

Smaller Reporting Company Compliance and Disclosure

Interpretations -- http://www.sec.gov/info/smallbus/src- cdinterps.htm

Division of Corporation Finance Office of Small Business

Policy – (202) 551-3460

This slide provides links to the final rule release (no. 338876) on the SEC’s

website. It also provide links to a Compliance Guide written to help smaller

reporting companies adopt the new rules and a list of Compliance and Disclosure Interpretations addressed by the Office of Small Business Policy related to the new rule. 13

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Other SEC Key Developments Other SEC Key Developments

Sarbanes-Oxley Internal Control Over Financial Reporting in

Exchange Act Periodic Reports of Non- Accelerated Filers (Release 33-8934)

Delays Section 404(b) requirement until

fiscal years ending after 12/15/09

Costs and Benefits Study of Sarbanes-Oxley

Act Section 404 (Press Release 2008-8)

International Financial Reporting Standards eXtensible Business Reporting Language

(XBRL)

Committee on Improvements to Financial

Reporting recommendations (CIFiR)

This slide highlights a few other key developments in which the Division of Corporation Finance staff is actively involved. For the latest information on these topics, please visit the following webpages: Sarbanes-Oxley Act http://www.sec.gov/spotlight/soxcomp.htm International Financial Reporting Standards (IFRS) http://www.sec.gov/spotlight/ifrsroadmap.htm eXtensible Business Reporting Language (XBRL) http://www.sec.gov/spotlight/xbrl.shtml Committee on Improvement to Financial Reporting (CIFiR) http://www.sec.gov/about/offices/oca/acifr.shtml 14

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Key US GAAP Developments Key US GAAP Developments

Fair Value Accounting Fair Value Accounting – – SF S AS 159 AS 15 an a d 157 F 9 nd 157

Effective for fiscal years beginning on or afte

Effectiv r 11/15/07 e for fiscal years beginning on or after 11/15/07

Letters on SFAS 157 disclosures

Letters on SFAS 157 disclosures – – http://www.sec.gov/divisions/corpfin/guidance/fairvaluelt

http:// r www.sec.gov/divisions/corpfin/guidance/fairvalueltr0 308.htm 308.htm (March 20 (Mar 08) 08 ch 20 )

http://www.sec.gov/divisions/corpfin/guidance/fairvaluelt

http:// r www.sec.gov/divisions/corpfin/guidance/fairvalueltr0 908.htm 908.htm (September 20 (Se 08) 08 ptember 20 )

Clarifications on fair value accounting

Clarifications on fair value accounting -

http://

http://ww w w. w sec.g sec

w . .gov/new /ne s/ s w / press/2008/2008 press/2008/2008-

234.

23 htm ht 4. m

FASB Proposed Interpretive Guidance on SFAS 157

FASB Proposed Interpretive Guidance on SFAS 157 – – FSP SF F AS A 157 SP SF S 157-

Business Combinations and Noncontrolling interests Business Combinations and Noncontrolling interests– – SFAS SFAS 141(R) and SFAS 160 141(R) and SFAS 160

Effective for fiscal years beginning on or afte

Effectiv r 12/15/08 e for fiscal years beginning on or after 12/15/08

FASB Accounting Standards Codification

FASB Accounting Standards Codification --

- asc.

as fasb. fa

rg
c.
sb. rg

One

One-

year Verifi

y cation Phas cation Pha e ear Verifi se

SAB 74 SAB 74 – – Requires disclosure regard ding impact of new w standards Requires disclosure regar ing impact of ne standards

The FASB has recently been issuing standards that signal a focus on fair value, including two that became effective this calendar year. First, SFAS 159 permits entities to measure certain financial assets and liabilities at fair value. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 141(R) and SFAS 160 will become effective in 2009. SFAS 141(R) has a broader scope than the prior standard and applies to any situation in which an entity

btains control over an other. It also changes the recognition for certain assets and

liabilities and costs pertaining to the transaction. SFAS 160 will change the accounting for and presentation of noncontrolling interests, previously referred to as minority interests. The FASB launched the oneyear verification phase of the FASB Accounting Standards Codification (Codification). During the verification period, constituents are encouraged to use the online Codification Research System free of charge to research accounting issues and provide feedback on whether the Codification content accurately reflects existing U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Users are advised that the Codification content is not yet approved as authoritative and, therefore, they must verify research results using their existing resources for the currently effective literature. It is important to note the Codification was not intended to change US GAAP, but to simplify it by reorganizing all literature in a topical structure. In light of these development as well as others not discussed here, we would like to remind registrants of the guidance in SAB 74 which discusses required disclosures to discuss the anticipated impact of new accounting standards that have been issued but not yet adopted. 15

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The Comment Letter Process The Comment Letter Process

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Comment Letter Process Comment Letter Process

Filings Subject to Staff Review Filings Subject to Staff Review

Selected by the SEC

Selected by the SEC’ ’s confidential internal s confidential internal screening criteria and Sarbanes screening criteria and Sarbanes-

Oxley

Oxley requirements requirements

IPOs

Other registration statements

Annual reports

Proxy statements

Item 4.01 and Item 4.02 Form 8

Item 4.01 and Item 4.02 Form 8-

Ks

As required by the SarbanesOxley Act of 2002, the Division undertakes some level

f review of each reporting company at least once every three years and reviews a

significant number of companies more frequently. In addition, the Division selectively reviews transactional filings – documents companies file when they engage in public offerings, business combination transactions, and proxy solicitations. In deciding how to allocate staff resources among filings, the Division undertakes a substantive evaluation of each company’s disclosure in what it calls a preliminary

review. To preserve the integrity of the selective review process, the Division does

not publicly disclose its preliminary review criteria. Based on its preliminary review, the Division decides whether to undertake any further review of the company’s filings or whether the company’s disclosure appears to be substantially in compliance with the applicable accounting principles and the federal securities laws and regulations. In addition, the Staff also reviews each Form 8K filed on Items 4.01 and 4.02 for compliance with the disclosure requirements and issues comment letters as necessary. 17

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Comment Letter Process Comment Letter Process

Types of Comments Types of Comments

Request for additional supplemental

Request for additional supplemental information information

Provide additional or different disclosure in a

Provide additional or different disclosure in a future filing future filing

Amend filing to revise financial statements or

Amend filing to revise financial statements or disclosure disclosure

No further comments letter

Levels of Review If the Division selects a filing for further review, the extent of that further review will depend on many factors, including the results of the preliminary review. The level of further review may be:

a full covertocover review in which the staff will examine the entire filing for

compliance with the applicable requirements of the federal securities laws and regulations;

a financial statement review in which the staff will examine the financial

statements and related disclosure for compliance with the applicable accounting standards and the disclosure requirements of the federal securities laws and regulations; or

a targeted issue review in which the staff will examine the filing for one or more

specific items of disclosure for compliance with the applicable accounting standards and/or the disclosure requirements of the federal securities laws and regulations. Staff Comments The Division views the comment process as a dialogue with a company about its disclosure. The Division’s comments are in response to a company’s disclosure and other public information and are based on the staff’s understanding of that company’s facts and

circumstances. In issuing comments to a company, the staff may request that a company

provide additional supplemental information so the staff can better understand the company’s disclosure, revise disclosure in a document on file with the SEC, provide additional disclosure in a document on file with the SEC, or provide additional or different disclosure in a future filing with the SEC.

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Comment Letter Process Comment Letter Process

Best Practices for Resolving Issues

Prepare a thorough response

An invitation to a dialo

An invitat gue ion to a dialogue

Key response to initial

Ke comment y response to initial comment

Indicate specifically where revisions have been

Indicate specifica made lly where revisions have been made

Discuss supporting authoritative literature in

Discuss supporting aut detail horitative literature in detail

Inform Staff if you are unable to respond by

Inform Staff the if you are unable to respond by the requested date requested date

Document accounting decisions contemporaneously

A company generally responds to each comment in a letter to the staff and, if appropriate, by amending its filings. A company’s explanation or analysis of an issue will often satisfactorily resolve a comment. Depending on the nature of the issue, the staff’s concern, and the company’s response, the staff may issue additional comments following its review of the company’s response to its prior

comments. This comment and response process continues until the Division and the

company resolve the comments. It is most important for registrants to take the time and prepare a thorough response. The response should be focused on the specific questions asked by the staff, but should be robust so the staff fully understands the accounting and/or disclosure being questioned. If the registrant has revised its filing or plans on revising its flings in response to the staff’s comments, it is very helpful to provide proposed disclosure or marked pages. If the staff has asked a question on the registrant’s basis for a particular accounting treatments, it is important for them to refer to any literature in GAAP that they relied upon to reach their conclusions. Again, providing a detailed and complete explanation to the staff in response to the initial comment letter may lessen the likelihood of future comments or at least narrow the dialogue. To ensure your response is sufficient, the ten business days referred to in the comment letter may not be adequate. In case, you should simply contact the staff and discuss the date on which you expect to respond. Finally, it will be easier to respond to comments if you have documented your significant accounting decisions contemporaneously with the literature you relied upon, the alternatives considered, and the basis for your conclusions. 19

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Financial Reporting Issues Financial Reporting Issues Frequently Raised in Comment Frequently Raised in Comment Letters Letters

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Financial Reporting Issues Frequently Financial Reporting Issues Frequently Raised in Comment Letters Raised in Comment Letters

Revenue Recognition

Revenue Recognition

Business Combinations (incl. Reverse Me

Business Combinations (incl. Reverse M rgers) ergers)

Equity Transactions

Equity Transactions

Embedded Conversion Options and Warrants

Embedded Conversion Options and Warrants

Management

Management’ ’s Discussion and Analysis s Discussion and Analysis

Forms 8

Forms 8-

K on Item 4.01 and Item 4.02

K on Item 4.01 and Item 4.02

Internal Controls over Financial Reporting

Internal Controls over Financial Reporting

Certifications

Certifications

Audit Reports

Audit Reports

Other Areas (see Appendix)

Other Areas (see Appendix)

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Revenue Recognition Revenue Recognition

Common Areas of Comment Common Areas of Comment

Policy disclosures (i.e., SAB 104) Policy disclosures (i.e., SAB 104) “ “Boilerplate Boilerplate” ” disclosures disclosures Disclosure should be specific to company Disclosure should be specific to company’ ’s s revenue streams revenue streams EITF 00 EITF 00-

21 – – Multiple Multiple-

Element Arrangements

Element Arrangements EITF 99 EITF 99-

19 – – Gross versus Net Revenue Gross versus Net Revenue Recognition Recognition

We frequently request clarification of how companies recognize revenue, including how their revenue recognition specifically complies with SAB 104, which provides guidance on how to apply general accepted accounting principles to revenue recognition issues. We also ask companies to expand their revenue recognition accounting policy disclosures. In many cases, these comments are raised because of

verly vague or “boilerplate” disclosures provided by the company. Registrants

should take care to fully disclose the timing and method for recognizing revenue for each of their material revenue streams. As it relates to revenue recognition under EITF 0021, the staff frequently comments in situations where it is not clear that deliverables qualify as separate units of accounting or appears that they do not qualify as separate units. In such situations, the staff may ask the registrant how they evaluated each of the criteria in paragraph 9 to conclude that the delivered item could be considered a separate unit

f accounting.

Companies may recognize revenue on a gross basis when the disclosures raise question as to whether registrant is really acting as an agent and should be report revenue on a net basis. The opposite may occur where revenue is presented on a net basis, but the registrant’s business appears to be more in line with a principal. If there is not transparent disclosure in MD&A or elsewhere as to how the registrant reached its conclusions, the staff may comment and ask how the registrant has evaluated each of the indicators in EITF 9919, and which specific indicators carry the most weight in their fact pattern. 22

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Business Combinations Business Combinations

Business combination or asset purchase

EITF 98 EITF 98-

3 Rule 11 Rule 11-

01(d) of Regulation S

01(d) of Regulation S-

Purchase Price Allocation

Allocated to all assets and liabilities Allocated to all assets and liabilit acquired based ies acquired based upon fair value upon fair value Fair value of securities Fair va issued lue of securities issued

Disclosures

Annual vs. Interim peri Annu

al vs. Interim periods

NOTE: This slide presents comments issued by the staff prior to the effectiveness of SFAS 141(R), which is effective for fiscal years beginning on or after December 15, 2008; therefore it does not consider how these issues may be impacted by the revised standard. The threshold question when reviewing disclosures related to a business combination is “Is the transaction an acquisition of a business or assets?” Registrants should understand that you can reach different conclusion for accounting and reporting purposes. EITF 983 defines a business for determining if the transaction should be accounted for as a business combination under SFAS 141. Rule 1101(d) of Regulation SX defines a business for determining what financial information, such as separate financial statements are required to be filed with the SEC. The staff may also frequently comment on the purchase price allocation, whether it is related to a probable acquisition and included in the notes to pro forma financial information or a consummated acquisition and included in the notes to the financial statements. In general, the staff may request more information in situations where a disproportionate amount of the purchase price is allocated to goodwill may. This is even more likely if descriptions of the transaction indicate that other intangible assets may have been acquired, but no fair value assigned. Also, as it relates to intangible assets, the staff may raise questions when companies conclude that acquired intangible assets have indefinite lives, while some of the factors in paragraph 11 of SFAS 142 may be present. The staff may also comment in situations in which a registrant appears to be defaulting to using the straightline method when there may be clear evidence of another pattern in which the economic benefits of the asset are consumed. Paragraphs 51 – 57 of SFAS 141 requires disclosures for both annual period, paragraph 58 for interim

periods. Registrants should ensure they have included all disclosures addressed in the standard.

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Business Combinations Business Combinations

Reverse Acquisitions/Recapitalizations

Determination of the accounting acquirer Consider all factors in paragraph 17 of SFAS 141 Cost of the acquired entity Depends on whether it is a business combination or recapitalization Accounting acquirer’s audited F/S presented for all historical periods in subsequent reports Earnings per share recast to reflect exchange ratio Eliminate retained earnings of shell or legal acquirer Common stock of shell or legal acquirer continues Form 8-K requirements As in any acquisition, the accounting acquirer in a reverse acquisition is identified by consideration of all the facts and circumstances, including the conditions in paragraph 17 of SFAS 141. The acquisition of a private operating company by a nonoperating public shell is considered to be a capital transaction in substance, rather than a business combination. That is, the transaction is a reverse capitalization, equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation accompanied by a

recapitalization. The accounting is similar to that resulting from a reverse acquisition,

except that no goodwill or other intangible assets should be recorded. In a public shell reverse acquisition, the consideration transferred for the acquisition is recorded at the net book value of the assets of the public shell. However, in a reverse acquisition of a business, the accounting is the opposite of the legal form of the transaction. The cost of the acquired entity equates to the fair value of the outstanding equity interests of the legal acquirer on the acquisition date, excluding the shares issued in the merger. Stockholders’ equity for periods after the reverse acquisition is the equity of the combined

entity. Capital stock is stated as the par value of the legal acquirer’s outstanding common

stock after giving effect to the number of shares issued in the reverse acquisition. Historical stockholders' equity of the accounting acquirer for periods before the acquisition is consummated is retroactively restated to reflect the par value of the legal acquirer’s capital stock outstanding at each balance sheet date after giving effect to the number of shares issued in the merger. Any difference between the capital stock of the legal acquirer and the accounting acquirer is recorded as an adjustment to paidin capital of the combined entity. Operations prior to the merger are those of the accounting acquirer. Operating results for the legal acquirer are included in the financial statements of the combined entity from the date of acquisition. EPS for periods prior to the merger are restated to reflect the number of equivalent shares received by the accounting acquirer’s shareholders, that is, the average number of shares of the accounting acquirer outstanding during each period multiplied by the exchange ratio.

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Business Combinations Business Combinations

Entities Under Common Control

Net assets of acquiree are recorded at historical basis

Determining control group

Separate Financial Statements of an Acquired Business

Rule 3-05/Rule 8-04 of Regulation S-X

Predecessor Financial Statements

Registrant succeeds to substantially all of the business of another entity

Registrant’s own operations are relatively insignificant

Combinations of entities under common control are not considered business combinations under SFAS 141. The accounting for such transactions is in Appendix D to the standard. In general, such transactions between entities under common control are recorded at historical cost with retrospective presentation to the initial date in which the entities were under common control. The accounting is similar to the prior accounting for pooling transactions under APB 16. A control group is defined in EITF 025. A control group generally is immediate family members or a group of shareholders with contemporaneous written evidence

f an agreement to vote in concert.

A combination between entities under common control does not preclude the requirement for separate financial statements or pro forma financial statements (in the case of a probable transaction). Generally, separate financial statements are required under Rule 305 of Regulation SX for an acquired business or a probably acquisition, in the case of a registration

statement. The number of periods required is dependent on the significance tests in

Rule 102(w). In certain situations, a business may deemed as the predecessor of the registrant The definition of a predecessor is when the registrant succeeds to substantially all of the business of another entity and the registrant’s own operations are relatively

insignificant. In such cases, the predecessor must include the same periods and

information, such as MD&A required for the registrant. 25

SLIDE 26

Equity Transactions Equity Transactions

Fair Value Determination

If publicly traded in an active market, use quoted market price If discounts are appropriate under the circumstances, the should be supported by objective evidence If stock not publicly traded in active market Contemporaneous equity transactions with third parties Fair value of the services or goods provided may be used to measure the transaction, if more reliable Consider SFAS No. 157 & FSP SFAS 157-3 – management’s judgment

Disclosure

All major assumptions used to value stock options, warrants and

ther equity instruments

Footnotes MD&A (critical accounting estimates)

Consider sensitivity analysis

When smaller companies incorrectly determine fair value for equity issued to consummate certain transactions, such as compensation arrangements and business combinations, it can often lead to material misstatements. The staff will frequently comment if a registrant has used a value different from quoted market price to value its equity if it is determined that the stock trades in active market. Blockage discounts are not permitted if using quoted market price. Discounts trading restrictions may be permitted in certain circumstances provided they are characteristics of the security and can be supported with objective evidence. If the stock does not trade in an active market, the staff may look to cash transactions with third parties for the same security in close proximity to support fair value or other may consider the fair value of the services and/or good if that measure is more

reliable. Absent market prices in an active market or other objective measures of

fair value, management should use its judgment considering the fair value hierarchy in determining a fair value that is supportable Because of the significant impact that fair value determinations can have on the financial statements, it is important that registrants provide sufficient disclosure surrounding how the fair value was determined and the impact that reasonable changes in assumptions could have on the measure and on the financial statements directly. 26

SLIDE 27

Embedded Conversion Options and Embedded Conversion Options and Freestanding Warrants Freestanding Warrants

Primary issues: Bifurcation of conversion option Classification as liability or equity Instruments involved: Convertible debt Convertible preferred stock Freestanding warrants to buy registrant’s stock

NOTE: Slides on Embedded Conversion Options and Freestanding Warrants present comments issued by the staff in past years and therefore, prior to the effectiveness of certain EITF Issues and FASB Staff Positions. Preparers may need to separately consider how FSP APB14-1, EITF Issues 07-5, 08-4, and 08-8 may impact their conclusions. Because of the complexity of the financing transactions as well as the complexity of the underlying accounting guidance, issues pertaining to convertible instruments and warrants have become a source of staff comments and restatements in recent years. The comments have primarily involved convertible debt instruments, but convertible preferred stock and freestanding warrants have also been impacted. 27

SLIDE 28

Embedded Conversion Options and Embedded Conversion Options and Freestanding Warrants Freestanding Warrants (cont

(cont’ ’d) d)

Analysis Analysis

Is the instrument within scope of SFAS 150 I ? s the instrument within scope of SFAS 150? Analyze under SFAS 133 Analyze under SFAS 133 – – tw t

rout
es

w routes 1. 1. Freestan Free ding standing

Account for as a derivative under SF

Acc AS 133

unt for as a derivative under SFAS 133
Perform 00

Perform 00-

19 Analysis in consideration of

1 EI E TF 01 9 Analysis in consideration of ITF 01-

Account for as equit

Ac y count for as equity

Account for as a liabilit

Account for as a liability 2. 2. Embedd Emb ed edded

Do not bifurcate under SFAS 133 (this often require

Do not bifurcate under SFAS 133 (this often requires performing an EITF 00 performing an EITF 00-

19/EITF 01

19/EITF 01-

6 An

6 A alys aly is w is hi h ch c n s w i h may require bifurcation) may require bifurcation)

Consider ASR 268/EITF D

Consider ASR 268/EITF D-

98 and APB 14

98 and APB 14

BCF under EITF 98

BCF under EITF 98-

5 and

5 00 and 00-

Bifurcate

Bifurcate – – Account as deriv ri a vative ve liability (SFAS 133) ti Account as de liability (SFAS 133)

NOTE: Slides on Embedded Conversion Options and Freestanding Warrants present comments issued by the staff in past years and therefore, prior to the effectiveness of certain EITF Issues and FASB Staff Positions. Preparers may need to separately consider how FSP APB14-1, EITF Issues 07-5, 08-4, and 08-8 may impact their conclusions.

It is a complicated path to determine the appropriate accounting for such instruments. The first step is to determine whether the instrument is within the scope of SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and

Equity. If the instrument is within the scope of SFAS No. 150, the guidance in that standard

will determine whether the instrument should be classified as a liability or equity. If the financial instrument is a freestanding warrant and is not within the scope of SFAS No. 150, it may be within the scope of SFAS No. 133. Presuming the warrant is indexed to a company’s own stock under EITF Issue 016, companies should evaluate EITF Issue 0019 to determine whether the instrument is more appropriately classified within equity with no adjustments for changes in fair value or classified as a liability at fair value with adjustments each period. As it relates to hybrid financial instruments, such as convertible debentures, any embedded derivatives must be analyzed under paragraph 12 of SFAS No. 133 to determine whether the derivative should be bifurcated and accounted for separately under SFAS No. 133. A key component in that analysis is determining whether the embedded derivative is clearly and closely related to the host, which more frequently fails to be the case for convertible debt

instruments. Companies should consider the staff’s views in EITF Topic D109 when the

hybrid financial instrument is in the form of a share. If it is not clearly and closely related and is indexed to the company’s own stock under EITF Issue 016, companies should analyze whether the embedded derivative would be classified as a liability or equity under EITF Issue 0019 if it were a freestanding derivative. If the embedded derivative is not bifurcated under SFAS No. 133, the company should consider EITF Topic D98 and ASR 268 if the instrument is redeemable preferred stock in determining the classification and measurement. Finally, companies should consider whether there is a beneficial conversion feature to be accounted for under EITF Issues 985 and 0027. This will generally be the situation when the effective conversion price (after consider any allocation of proceeds to detachable warrants under APB 14) is less than the market value of the company's stock on the commitment date.

28

SLIDE 29

Embedded Conversion Options and Embedded Conversion Options and Freestanding Warrants Freestanding Warrants (cont

(cont’ ’d) d)

Scope of EITF 00-19

Applies to all contracts that are indexed to, and potentially settled in a company’s own stock Paragraphs 12 through 32 do not apply to conventional convertible debt instruments

Common Pitfalls of EITF 00-19

Cash settlement provisions Required to settle in registered shares Registration Payment Arrangements are accounted for separately under FSP EITF 00-19-2 Insufficient authorized shares No limit on # of shares to be delivered Incorrect conclusion on whether instrument is indexed to a company’s own stock (EITF 01-6)

Evaluate the provisions of your agreements (Debt, warrant,

reg. rights, anti-dilution provisions, etc.) carefully

NOTE: Slides on Embedded Conversion Options and Freestanding Warrants present comments issued by the staff in past years and therefore, prior to the effectiveness of certain EITF Issues and FASB Staff Positions. Preparers may need to separately consider how FSP APB14-1, EITF Issues 07-5, 08-4, and 08-8 may impact their conclusions. As discussed on the previous slides, EITF Issue 0019 is instrumental to this

analysis. The issue generally applies to freestanding derivatives that are indexed to

and potentially settled in a a company’s own stock. In the situation of evaluating convertible debt instruments, companies must first conclude whether the instrument is a conventional convertible debt instrument, as explained in EITF Issue 052. If the instrument is a conventional convertible debt instrument then paragraph 12 through 32 of EITF Issue 0019 do not apply and will not have to evaluated, but the remaining paragraphs should still be considered. It is important to note that agreements that contain clauses to adjust the conversion price other than standard antidilution provisions that apply to all shareholders are not considered conventional convertible. This frequently creates problems for smaller companies. Some other common pitfalls that may lead to an embedded derivative needing to be bifurcated and accounted for as a derivative liability are listed on the slide. That staff frequently finds that restatements in this area are commonly the result of companies not carefully considering and evaluating the accounting implications of provisions of their agreement at the time they are negotiating them or when the transaction is completed. 29

SLIDE 30

Management Management’ ’s Discussion & s Discussion & Analysis (MD&A) Analysis (MD&A)

Release Nos. 33 Release Nos. 33-

6835

68 and 3 and 3 35 33-

8350

8350 Best Practices Best Practices

Executive Executive-

level overview (including discussion of im

lev pact of cur pact of re r nt el overview (including discussion of im cur ent economic conditions) economic conditions) Critical accounting estimates Critical accounting estimates Provide insight into the quality and variability Pro

f financial

vide insight into the quality and variability of financial information (including fair value measurements) information (including fair value measurements) Comparative results of operat Comparative results of ions that are thorough and

perations that are thorough and ad

a dress the ddress the causal factors causal factors of change

f change

Liquidity and capital resource Liquidity s and capital resources Enhanced analysis and explanation of the sources and us Enhance es of d analysis and explanation of the sources and uses of cash cash z z Consider categories reported on statement of cash flow Consider categori s es reported on statement of cash flows Address going A concern matters ddress going concern matters Consider enhanced disclosure regarding debt instrument Co s, nsider enhanced disclosure regarding debt instruments, guarantees and related covenants. guarantees and related covenants.

The MD&A has three general objectives: to provide a narrative explanation of a company through the eyes of management; to provide the context within which financial information should be analyzed; and to provide information about the quality of, and potential variability

f, a company's earnings and cash flow, so that investors can ascertain the likelihood that

past performance is indicative of the future. In accomplishing these objectives, the staff generally recommends that companies provide an overview highlighting BOTH financial and nonfinancial key performance indicators as background to understanding the company’s overall performance for the periods. Depending on the nature of a company’s operations, it may have certain estimates that have a material impact on the underlying financial statements and are subject to significant judgment and uncertainty. With the intent of providing insight in to the quality and variability of the financial statements, management should clearly identify those estimates, provide readers with an understanding of the methodology and underlying assumptions to arrive at the estimate and analyze the impact that reasonable changes in the assumptions could have on the financial statements. The staff often finds that registrants do not adequately discuss the factors contributing to fluctuations in operating activities from period to period. The discussion of fluctuations should help readers understand the factors that contributed to changes in underlying line items and the magnitude of that impact. Finally, companies tend to overlook the importance of a discussion of liquidity and capital

resources. This discussion should focus on how the company has been able to meet its cash

requirements in historical periods through a thorough analysis of the statements of cash flows and how they expect to meet them in the future through a discussion of commitments, debt covenants, and significant contractual obligations.

30

SLIDE 31

Form 8 Form 8-

K

Form 8 Form 8-

K interpretations updated on June 26, 2008

K interpretations updated on June 26, 2008 at at http://www.sec.gov/divisions/corpfin/guidance/8 http://www.sec.gov/divisions/corpfin/guidance/8-

kinterp.htm

kinterp.htm All Item 4.01 and Item 4.02 8 All Item 4.01 and Item 4.02 8-

K filings reviewed for

K filings reviewed for strict compliance strict compliance Frequent Item 4.01 comments Frequent Item 4.01 comments

Failure to specify whether former a

Failure ccountants resigned, to specify whether former accountants resigned, declined to stand for re declined to stand for re-

election, or were

election, or dism dis issed and the were missed and the date date

Reverse acquisiti

verse acquisitions

Accounting firm merger

Accounting fir s m mergers

Exhibit 16 le

Exhibit tter 16 letter

As mentioned in a prior slide, Forms 8K on Items 4.01 and 4.02 are frequently reviewed by the staff. As it relates to Item 4.01 Form 8Ks, the comments are generally focused on compliance with the item requirements. They may ask for more information about the facts and circumstances surrounding the change in accountants. The staff may also comment if the Exhibit 16 letter signed by the former accountants has not been filed in a timely manner. Finally, such Form 8Ks will usually need to be filed upon the consummation of a reverse merger or upon merger of the registrant’s accountants with another firm. 31

SLIDE 32

Form 8 Form 8-

K

Most Item 4.02 comments relate to Item Most Item 4.02 comments relate to Item 4.02(a 4.02( ) a)

Triggering event other than non

Triggering event other than non-

reliance

reliance conclusion (e.g., completion of restatement) conclusion (e.g., completion of restatement)

Unclear statement regarding non

Unclear statement regarding non-

reliance

reliance

Brief description of facts lacking or unclear

“

“Stealth restatements Stealth restatements” ”

As it relates to Item 4.02 Form 8K, again comments will generally be focused on compliance with the item requirements. Companies should provide a description of the facts and circumstances leading to the restatement, including the triggering event that led to the conclusion. The triggering event should be the conclusion that previously issued financial statements can no longer be relied up rather than the restatement of those financial statements. Finally, companies should clearly state the periods for which the financial statements can no longer be relied upon and quantify the impact of that determination to the extent known. Form 8K allows registrants to disclose reportable items in periodic reports coming due if the event occurs within the four business days. Therefore, certain companies have been disclosing the nonreliance on previously issued financial statements in the same report (either 10K or 10Q) in which they are restating their financial

statements. The staff has commented in an FAQ document referred to in an earlier

slide, that we would expect registrants to always reports Items under 4.01 and 4.02

n Form 8K rather than in another periodic report.

32

SLIDE 33

Internal Control over Financial Internal Control over Financial Reporting (ICFR) Reporting (ICFR)

Management Reports under Item 308(a) of Regulation S Management Reports under Item 308(a) of Regulation S-

Separate evaluation and assessment from evaluation of disclosure controls and procedures All four elements in Item 308(a) must be addressed in disclosure ICFR cannot be “effective” if material weakness exists Disclosures when material weakness exists Nature of the material weakness Impact of material weakness on company’s financial reportin and ICFR Current plans, if any, or actions already undertaken to remediate the material weakness (could be included in Item 308 (c) of Regulation S-K) Should be detailed and specific for each material weakness identified

All issuers, other than newly public companies, registered investment companies, and assetbacked issuers, are required to include management’s report on internal control over financial reporting in their annual reports. While there is some overlap between disclosure controls and procedures and internal control over financial reporting, management is required to assess the effectiveness of each on an annual basis and only disclosure controls and procedures

n a quarterly basis, including yearend.

Registrants are required to disclose all material weaknesses identified. If any material weaknesses are identified, management must conclude that internal controls over financial reporting are ineffective. Disclosures of material weaknesses are most helpful if they allow the reader to determine the pervasiveness and impact on the financial statements. Registrants should also consider specifically explaining the weaknesses in internal controls that were identified rather than limiting the discussion to identifying the impacted financial statement area. Finally, it can be meaningful if registrants disclose current plans to remediate the weakness and provide disclosures of any changes to internal controls over financial reporting as the result of remediation efforts in conjunction with the required disclosures under Item 308(c) of Regulation SK. 33

SLIDE 34

Internal Control over Financial Internal Control over Financial Reporting (ICFR) Reporting (ICFR)

Auditor attestation under Item 308(b) of Regulation S-K

No specific requirement for location in filing No specific requirement for location in filing

Generally in close proximity to financial statement opinion o G r enerally in close proximity to financial statement opinion or management management’ ’s re s r port por e t

Not currently required for non Not currently required for non-

accelerated filers

accelerated filers If auditor attestation not included, registrant must If auditor attestation not included, registrant must include statement that ICFR has not been attested include statement that ICFR has not been attested to by auditor (See Item 308T of Regulation S to by auditor (See Item 308T of Regulation S-

K)

The auditor attestation on internal control over financial reporting is currently only required for accelerated filers and largeaccelerated filers. The requirement to include the auditor attestation has been deferred for nonaccelerated filers until years ending on or after December 15, 2009. Such filers should include the disclosure specifically referred to in Item 308T of Regulation SK to inform readers why the attestation report has not been included. 34

SLIDE 35

CEO/CFO Certifications CEO/CFO Certifications

Certifications should not deviate from specific form and content in Item 601(b)(31)(ii) of Regulation S-K Internal control over financial reporting (ICFR)

SEC Release 33 SEC Release 33-

8238 (June 2003) p

823 ermitted exclusion of: e 8 (June 2003) p rmitted exclusion of: introductory language in paragraph 4 referring t introductory

language in paragraph 4 referring to

responsibility for establishing and maintaining ICFR responsibility for establishing and maintaining ICFR Paragraph 4(b) (certifying officer Paragraph 4(b) (certify has designed or ing officer has designed or supervised the design of supervised the design ICFR)

f ICFR)

Starting with first period in which management is requ Starting ired with first period in which management is required to assess ICFR, these statements can no longer to assess ICFR, these statements can no be longer be excluded excluded

The certifications required by Section 302 of the SarbanesOxley Act and included as an exhibit to the quarterly reports and annual report cannot deviate in form or content from what is included in Item 601(b)(31)(ii) of Regulation SK. To the extent necessary, management must include appropriate disclosures in the filing that allow them to sign the certifications as prescribed. In the past, changes to the certifications have gone overlooked by management for a period of time. With that experience, the staff would like to remind nonaccelerated filers that they should now be including the introductory language in paragraph 4 and paragraph 4(b) in each periodic report since they are now required to comply with Section 404(a) of the SarbanesOxley Act. 35

SLIDE 36

Audit Reports Audit Reports

Auditor must be PCAOB registered

Auditor must be PCAOB registered accountant that meets all of the accountant that meets all of the requirements of Article 2 requirements of Article 2

Audit reports must be filed for all

Audit reports must be filed for all financial statements required to be financial statements required to be audited audited

If audit report refers to the

If audit report refers to the report(s report(s) of ) of another another auditor(s auditor(s), the registrant must ), the registrant must include those repo include those rep rts in the filing

rts in the filing

Audit reports that do not comply with Article 2 of Regulation SX frequently stop the review of a registration statement and will always generate staff

comment. The financial statements of all issuers must be audited by

accountants that are registered with the PCAOB and meet the requirements of Article 2 of Regulation SX. In situations where another accountant plays a “substantial role” (as defined in PCAOB Rule 1001(t)(ii)) in the audit of an issuer (e.g. auditing a significant subsidiary), that accountant may also need to be registered with PCAOB. In the situation of an initial registration statement, the audit report must refer to PCAOB standards. However, since the company is not considered an “issuer” at that time, their accountant does not need to be registered. They will need to be registered for any opinions on subsequent periods or any additional work on the periods included in the registration (e.g. restatements). Unregistered firms are still able to issue consents for periods audited prior to the initial registration statement. Regardless of whether a given period was audited by the current auditor or a predecessor auditor, each period for which financial statements are included in the filing must have a related audit report included in the filing. In addition, if the audit report refers to the report of another audit report in expressing their opinion, that report must be included in the filing as well. For the purposes of any registration statement, each and every audit firm who has issued an opinion in an audit report included in the registration statement must consent to the inclusion of that report in the registration statement. 36

SLIDE 37

Management Management’ ’s Report on Internal s Report on Internal Control over Financial Reporting Control over Financial Reporting

37

SLIDE 38

Management Management’ ’s Report on Internal s Report on Internal Control over Financial Reporting Control over Financial Reporting

Current Status (Where are we now?)

Current Status (Where are we now?)

Recent Developm

Recent Develop ents ments

Staff observations

Staff observations

Overview of Management

Overview of Management’ ’s Assessment s Assessment

38

SLIDE 39

Current Status (Where are we now?) Current Status (Where are we now?)

Provide Management

Provide Management’ ’s Asses s As sment Only sment ses Only

Nonaccelerated Fi

Nona lers ccelerated Filers

Years ended after on or after 12/15/0

Years e 7 nded after on or after 12/15/07

Provide BOTH Management

Provide BOTH Management’ ’s Ass s essment and Auditor essment an Ass d Auditor’ ’s s Attestation Attestation

Accelera

Accelerated Filers ted Filers

Large Accelerated File

Lar rs ge Accelerated Filers

All Companies beginning with years ending on or after 12/15/0

All C 9

mpanies beginning with years ending on or after 12/15/09
Exceptions

Exceptions

New P

Ne u w Public Co C mpanie

mpanies

blic

Business Combinations (as it relates to acquired business

Bu ) siness Combinations (as it relates to acquired business)

Other

Beginning with fiscal years ended on or after December 15, 2007, nonaccelerated filers are required to conduct an evaluation of internal control over financial reporting and furnish an assessment under Section 404(a) of the SarbanesOxley Act of 2002. Accelerated filers (including large accelerated filers) are required to file management’s assessment of internal control over financial reporting under Section 404(a) AND an attestation report by its independent registered accountants under Section 404(b) of the SarbanesOxley Act of 2002. Based upon the most recent rulemaking by the Commission, all issuers will be required to file management’s assessment of internal control over financial reporting AND an attestation report by its independent registered accountants for fiscal years ending on or after December 15, 2009. This may be impacted by the costbenefit study that will be performed at the direction of the Commission. The only exception to the requirement to provide management’s assessment of internal control over financial reporting relates to newly public companies, registered investment companies, and asset backed issuers. Instruction 1 to Item 308 of Regulation SK limits the requirements to registrants who had been required to file or had filed an annual report with the SEC for the prior year. Guidance issued by the staff in the form of a Frequently Asked Questions (http://www.sec.gov/info/accountants/controlfaq.htm) document permits companies to exclude material acquired businesses accounted for as business combinations from the scope of their assessment for the year in which the transaction was consummated if it is impracticable to assess the controls of the business prior to filing the annual report. In such circumstances, the registrant must disclose the significance of the business to the consolidated financial statements. Neither this guidance nor the release providing relief to newly public companies permits any relief or scope exceptions to reverse mergers or similar transactions. Companies who are unable to conduct an assessment due to the consummation of a transaction not addressed in any Staff guidance or SEC rules (such as reverse mergers) should contact the Staff prior to their yearend.

39

SLIDE 40

Recent Developments Recent Developments

404(a): SEC 404(a): SEC’ ’s Guidance for Management s Guidance for Management

Interpretive Guidance approved by Interpretive Commission on Guidance approved by Commission on May 23, 2007 May 23, 2007

Issued Issued -

“Sarbanes Sarbanes-

Oxley Section 40

Oxle 4: A Guide fo 4: A Guide f r y Section 40

Small Business Small Business” ”

Both available on SEC website Both available on at: SEC website at: http:// http://www.sec.gov/spotlight/soxcomp.ht w m ww.sec.gov/spotlight/soxcomp.htm

404(b): 404(b): PCAOB PCAOB’ ’s s Guidance for Auditors Guidance for Auditors

Auditing Standard No. 5 (AS 5) Auditing Standard No. 5 (AS 5) Approved by PCAOB on M Appro ay 24, 2007 ved by PCAOB on May 24, 2007 Approved by Commission on July 25 Appro , 2007 ved by Commission on July 25, 2007 Draft Issued Draft Issued – – “ “Prel Pre iminary Staff Views liminary Staff Views – – Guidan Guida ce nce for Auditors of Smaller Public Companies for Auditors of Smaller Public Companies” ”

Related to Section 404(a) of the SarbanesOxley Act of 2002, the SEC issued Commission Guidance Regarding Management’s Report on Internal Control Over Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Management’s Guidance”) in May 2007. It is not required to be followed. The release was issued specifically to provide management guidance for one way to complete a topdown riskbased evaluation of internal control over financial

reporting. Prior to its issuance, there was no management guidance; therefore,

management often used the auditing standards in completing its assessment. The Staff also issued a brochure or guide for smaller companies completing their assessment of internal control over financial reporting. The brochure provides a brief overview of the approach outlined in Management’s Guidance that may assist smaller reporting companies in completing their evaluations. However, it is not a replacement for Management’s Guidance. In conjunction with issuing Management’s Guidance, the PCAOB issued Auditing Standard No. 5 (“AS5”) which superseded Auditing Standard No. 2 (“AS2”), the prior auditing standard on audits of internal control over financial reporting. The SEC approved AS5 in July 2007 and it is now effective for all audits of internal control over financial reporting. In addition, the PCAOB has issued a draft document on Preliminary Staff Views – Guidance for Auditors of Smaller Public Companies which should be a helpful resource for firms applying AS5 to smaller public companies. 40

SLIDE 41

Recent Developments Recent Developments

404(b): Deferral of Compliance for Non 404(b): Deferral of Compliance for Non-

Accelerated Filers

Accelerated Filers

Provides additional one Provides additional one-

y ar deferral (years ending ar deferral (y e ears ending

n or after 12/15/09)
n or after 12/15/09)

Cost Cost-

Benefit Study

Benefit Study

The SEC has recently deferred the requirement for nonaccelerated filers to comply with 404(b) until fiscal years ending on or after December 15, 2009. As mentioned in the release accompanying the extension, one of the primary drivers for the deferral related to a study that the Commission is undertaking to help determine whether our new management guidance on evaluating ICFR and AS No. 5 are having the intended effect of facilitating more costeffective ICFR evaluations and audits for smaller reporting companies. This study, which is being led by our Office

f Economic Analysis, includes gathering data from a broad array of companies

about the costs and benefits of compliance with the ICFR requirements. 41

SLIDE 42

Top 5 Deficiencies for First Top 5 Deficiencies for First-

timers

timers

1.

1. Companies began but did not finish their

Companies began but did not finish their assessment assessment 2.

2. Companies were silent as to whether they did

Companies were silent as to whether they did an evaluation and assessment an evaluation and assessment 3.

3. Companies did not believe they were required

Companies did not believe they were required to conduct an evaluation to conduct an evaluation 4.

4. Companies did not perform an assessment

Companies did not perform an assessment because they consummated a reverse merger because they consummated a reverse merger

r were a shell company
r were a shell company

5.

5. Companies appear to have performed an

Companies appear to have performed an assessment but did not disclose a conclusion assessment but did not disclose a conclusion

This past summer, the staff in the Division conducted targeted reviews of the disclosures for management’s assessment of internal control over financial reporting (Item 308 of Regulation S K) specifically focused on the nonaccelerated filers that had performed an evaluation and assessment for the first time in 2007. Some of the more significant deficiencies noted regarding compliance were as follows:

1. In certain circumstances, companies disclosed that they did not complete their evaluation

because they were unable to finish due to insufficient time or resources.

2. In many cases, companies did not include any disclosure that explicitly stated whether or

not they conducted an evaluation or what the conclusions were. We have found that in certain cases, registrants had forgotten to include the disclosure because it was a new requirement for them or were confused about the distinction between internal control

ver financial reporting and disclosure controls and procedures and that two separate

assessments are required.

3. For various reasons, certain companies incorrectly did not believe that they were

required to conduct an evaluation. Among various reasons, some inappropriately concluded they were newly public companies (but were not based upon Release 33 8760) and others believed that the requirement was still deferred.

4. A limited number of companies did not complete an assessment because they did not

think it applied to shell companies or they were a shell company that recently completed a reverse merger with an operating company. These companies are not newly public companies; therefore, absent any discussions with the staff on this topic, these companies are required to comply with Section 404(a) of the SarbanesOxley Act of 2002.

5. Finally, some companies indicate in their disclosure that they DID conduct an evaluation
f internal control over financial reporting but did not disclose their conclusion

regardless of whether they had disclosed material weaknesses or not.

42

SLIDE 43

Comment Letters Comment Letters

Comments sent to numerous registrants w Comments sent to numerous registrants ho who did not comply with Section 404(a) did not comply with Section 404(a) Assessment must be completed and filing must Assessment must be completed and filing must be amended be amended Exclusion of management Exclusion of management’ ’s report is a material s report is a material deficiency deficiency Company is not considered timely or cu Company rrent is not considered timely or current for use of certain forms for use of certain forms Question 115.02 of Regulation S Question 115.02 of Regulation S-

K Compliance and Disclosure Interpretations Compliance and Disclosure Interpretations

In each of the cases discussed on the previous slide, we had requested that the companies amend their annual report to include the appropriate disclosures in full compliance with Section 404(a) of the SarbanesOxley Act of 2002. It is the Staff’s view that exclusion of management’s report represents a material deficiency in the filing and these companies would not deemed to be current or timely for purposes of certain form eligibility. This issue was addressed by the Office of Chief Counsel in their Compliance and Disclosure Interpretation on Regulation SK (http://www.sec.gov/divisions/corpfin/cfguidance.shtml#regsk). 43

SLIDE 44

Other Staff Observations Other Staff Observations

Conclusions

Conclusions

Two conclusions are required (DCP and

T ICFR) wo conclusions are required (DCP and ICFR)

Must explicitly state whether they are effective

Must explicitl

y state whether they are effective or ineffective ineffective

M terial Weakness Disclosures aterial Weakness Disclosures

Is not transparent to allow reader to Is not determine transparent to allow reader to determine pervasiveness and impact on financial statements pervasiveness and impact on financial statements “ “Lagging Indicator Lagging Indicator” ” Narrowly focused on financial statement line it Narro em wly focused on financial statement line item

e.g.

e.g. “ “material weakness related to material income taxes income taxe weakness related to s” ” Remediation disclosures identify additional Remediation disc material losures identify additional material weaknesses or broader impact weaknesses or broader impact As was mentioned on the prior slide, we would like to reiterate that the conclusions related to internal control over financial reporting are separate and distinct (albeit they may be related) from the conclusions regarding the effectiveness of disclosure controls and procedures. Similar to that assessment, it is imperative that registrants explicitly state whether internal control over financial reporting is effective or ineffective with no qualifying language

r scope limitations (other than those expressly permitted in the FAQ document).

As it relates to both accelerated and nonaccelerated filers, the Staff continues to comment on and observes areas where disclosures of material weaknesses can be improved. Disclosures of material weaknesses should be robust enough to provide some transparency into the pervasiveness and impact a particular material weaknesses could have

n the financial statements. Such disclosures may indicate the individual line items that may be impacted by the

weakness, the potential magnitude of the impact as well as the likelihood. Some believe that the material weaknesses disclosures are not as useful as they could be, because companies are

ften only identifying material weakness once they have found an error rather than alerting investors in advance.

When evaluating whether deficiencies are in fact material weakness, companies may consider more carefully analyzing the likelihood that the deficiency could fail to prevent a material error. We also often see material weaknesses that are narrowly focused on one particular financial statement line item. For example, a company may disclose that it has material weaknesses related to its accounting for income taxes. Not

nly does this disclosure not specifically address the internal controls in which there are the weakness, it does not

consider the impact that the weakness could have on other financial statement line items. In other words, the disclosure should not be narrowly limited to the line item in which the deficiency was found. This very issue may also become evident through the remediation disclosures. For example, the remediation disclosures may indicate that the registrant is improving internal controls that go well beyond and impact more areas than the narrow material weakness disclosed.

44

SLIDE 45

Other Staff Observations Other Staff Observations

Identification of Acceptable Framework

Identification of Acceptable Framework

Management

Management’ ’s Guidance is not a framework s Guidance is not a framework One last area in which we continue to see inadequate disclosure or a lack of understanding by smaller reporting companies relates to the framework on which they our basing their evaluation. In adopting release related to the

assessment of ICFR, the Commission specified the characteristics of a suitable control framework and identified the “Internal Control – Integrated Framework(1992)” created by COSO as an example of a suitable framework. Management’s Guidance highlighted two other frameworks that met the characteristics outlined in the adopting release and encourages companies to examine and select a framework that may be useful in their own circumstances. It is important to note, however, that the guidance itself is not a framework

45

SLIDE 46

Overview of Management Overview of Management’ ’s s Assessment Assessment

Overview

Overview

Phase 1 Phase 1 Identify the financial reporting risk Identify s and the the financial reporting risks and the controls that adequately address these risks controls that adequately address these risks Phase 2 Phase 2 Determine the evidence needed to s Determine upport the the evidence needed to support the assessment, based on an evaluation of ICFR assessment, based on an evaluation of ICFR risk, and evaluate the operating effectivenes risk, and ev s of aluate the operating effectiveness of the controls identified in Phase 1 the controls identified in Phase 1 Phase 3 Phase 3 Report on th Rep e effectiveness of ICFR and disclose

rt on the effectiveness of ICFR and disclose

any material weaknesses identified during th any material weaknesses identified during the evaluation process evaluation process The objective of internal control over financial reporting is to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The purpose of the evaluation is to provide management with a reasonable basis for its annual assessment as to whether any material weaknesses in ICFR exists as of the end of the fiscal year. How companies design ICFR to provide reasonable assurance the financial statements are in accordance with GAAP may be different based upon size, organization, structure, etc. As a result, the method of evaluating those controls may be different. Management’s Guidance provides a tool for management in completing this evaluation allow flexibility and scalability based upon the particular company being evaluated. Management has always had a responsibility to maintain internal controls under the Foreign Corrupt Practices Act so the focus should be on what is in place already and not involve designing new internal controls. There are three phases in completing management’s assessment:

Phase 1 involves identifying the financial reporting risks and the controls

that adequately address these risks. In this phase, management needs to consider the sources and potential likelihood of misstatements and identify controls that address those financial reporting risks.

Phase 2 involves evaluating the operating effectiveness of the controls

identified in Phase 1, and determining the evidence needed to support the assessment based on the assessment of risk associated with the controls and the financial statement elements to which they relate.

Phase 3 involves reporting on the effectiveness of ICFR and disclosing all

material weaknesses identified in the process. 46

SLIDE 47

SEC Interpretive Guidance for SEC Interpretive Guidance for Management Management

Key Attributes

Key Attributes

Principles-based Directs efforts to highest risks of material

misstatement of financial statements

Allows evaluation processes tailored to facts and

circumstances

Provides guidance on supporting evidence and

documentation

Provides guidance for evaluating deficiencies Does not replace control frameworks Voluntary

Key things considered in developing the interpretive guidance were: Principlesbased guidance – The guidance does not provide detailed instructions on how management should approach its

evaluation. Rather than mandate how much something should be tested or guidance on sample size, the interpretive guidance

highlights the overriding principles that can be scaled to various companies. Directs effort to the highest risks of material misstatement of financial statements – The guidance employs a topdown risk based approach. The guidance allows companies to focus their efforts on those areas that management has identified as posing the greatest risks of material misstatements in the financial statements. Allows evaluation process tailored to facts and circumstances – Allows a company to scale its assessment to its particular facts and circumstances, which involves considering what controls management has in place to provide reasonable assurance that financial statements are prepared in accordance with GAAP. Provides guidance on supporting evidence and documentation Item 308 requires that management maintain reasonable support for its assessment. Management guidance provides direction on the supporting evidence and documentation that management should maintain to support its assessment. It outlines that the nature and extent of evidence necessary to support management’s assessment should vary based on the level of risk. In addition, with regards to documentation, the guidance

utlines that management’s support should include documentation of the design of controls management has placed in
peration to address financial reporting risks, and the basis for management’s assessment, including documentation of the

methods and procedures it utilizes to gather and evaluate evidence and how management formed its conclusion about the effectiveness of the company’s ICFR. The guidance does not prescribe any particular type or nature of documentation. In fact, documentation may consist of things that management already has in place – manuals, policies, email of instructions, etc. In addition, documentation should focus on the controls that management concludes are adequate to address the financial reporting risks – not documentation of all controls. Provides guidance for evaluating deficiencies – The guidance provides considerations for evaluating control deficiencies and determining whether they are significant or represent material weaknesses. The guidance also includes situations that, if they exist, management should consider whether they indicate that a deficiency exists and if so whether it represents a material

weakness. Significant deficiencies and material weaknesses are reported to the audit committee and external auditor and

material weaknesses are disclosed in management’s report. Management’s Guidance is not a framework – As mentioned previously, companies cannot reference Management’s Guidance as a framework in management’s assessment or in an audit report. They must still rely on another framework such as COSO and understand that the guidance is just to facilitate the assessment. As discussed before, the use of Management Guidance is voluntary but we believe it is a useful tool to assist management in utilizing a topdown risk based approach to their assessment

47

SLIDE 48

Resources Resources

48

SLIDE 49

Resources Resources

SEC Website – www.sec.gov www.sec.gov

Information for Accountants

Information for Accountants -

www.sec.gov/about/offices/oca.htm

www.sec.gov/about/offices/oca.htm

Information for Small Businesses

Information for Small Businesses -

www.sec.gov/info/smallbus.shtml

www.sec.gov/info/smallbus.shtml

Division of Corporation Finance

Division of Corporation Finance -

www.sec.gov/divisions/corpfin.shtml

www.sec.gov/divisions/corpfin.shtml

49

SLIDE 50

Questions Questions???

???

Key Telephone Numbers DCF Chief Accountant’s Office (202) 551-3400 DCF Office of the Chief Counsel (202) 551-3500 Office of the Chief Accountant (202) 551-5300 Office of Small Business Policy (202) 551-3460

50

SLIDE 51

Appendix Appendix

The following slides were not presented at the forums but included in the materials as a reference for participants. The following slides cover additional areas in which the staff frequently issues comments. 51

SLIDE 52

Financial Statement Classification Financial Statement Classification

Registrants that qualify Registrant as smaller reporting companies s that qualify as smaller reporting companies reporting under Article 8 of Regulation S reporting under Article 8 of Regulation S-

Need not apply the other form and content requirements i Need not apply the other form and content requirements in Regulation S Regulation S-

X exce

X ex pt: cept: Report and qualifications of the independent accoun Rep tan

rt and qualifications of the independent accountant

(Article 2 cle 2) (Arti Description of ion of accounting po nting policies (Rule 4 (Rule 4 accou – –08(n)) 08(n)) Descript licies Companies engaged in oil and gas producing activities (Rule 4 Companies engaged in oil and gas producing activities (Rule 4– 10) 10) Guidance outside of Regulation S Guidance outside of Regulation S-

X cont

X inues to inues apply t apply hat h ma m cont to t at ay result in comments. For example: result in comments. For example: Equity vs. non Equity vs. non-

equity (EITF Topi

eq c D uity (EITF Topic D-

9 and S and FAS No. F 150) 15 8 S AS No. 0) Operating, inve Op stin erating, investing, and financing cash flows (SFAS No. 95 inancing cash flows (SFAS No. 95) g, and f Discontinued operations (SFAS No Discon . 144) tinued operations (SFAS No. 144) Stock Stock-

based compensation expen

ba se ( se S sed compensation expen (SAB Topic 14F ic 14F) AB Top

While smaller reporting companies are not required to adhere to Articles 5, 6, 6A, 7,

r 9 on financial statement presentation and classification for specific industries,

they must follow the presentation and disclosure requirements of US GAAP and should consider related SEC Staff interpretations on those requirements. 52

SLIDE 53

Financial Statement Classification Financial Statement Classification

Registrants that do not qualify to report under Article Registrants that do not qualify to report under Article 8 of Regulation S 8 of Regulation S-

X

Subject to more detailed classification rules (e.g., Article Subject to 5 more detailed classification rules (e.g., Article 5

f Regulation S
f Regulation S-
X for commercial and

X for co industrial companies) industrial mmercial and companies) Rule 5 Rule 5-

02 -

balance shee

balance she ts ets Rule 5 Rule 5-

03 – – income statements income statements These additional rules most often result These additional rules in comments most often result in comments relating to Rule 5 relating to Rule 5-

03 Components of revenue Components of revenue Cost of sales Cost of sales Classification of share Classification of share-

based pay

based pa ments m y ents Operating vs. non Operating vs. non-

operating
perating

Companies that do not qualify as smaller reporting companies must adhere to the classification requirements within Article 5 or the appropriate Article for their industry. For these companies, the Staff may comment on certain classification issues such as:

Product and service revenues should be appropriately disaggregated on the face of the

income statement if they meet the 10% threshold in Rule 503 of Regulation SX. Registrant should also consider disaggregation if the margin on individual components are so different that they skew the company's margins presented on the income statement.

Costs of sales should generally include the appropriate allocation of depreciation and all
ther related costs. If deprecation is not included in costs of sales, companies should

clearly indicate that it has been excluded on the face of the income statement and refrain from presenting a measure of gross profit.

Sharebased payments should be classified within the same line item in which cash

compensation is classified for a given employee. The staff will not object if companies disclose the amount of sharebased compensation within a given line time parenthetically

n the face of the income statement or within the notes to the financial statements.
Finally, the staff may question the appropriateness of certain items that are classified as
perating items rather than nonoperating and vice versa. The determination should
ften be based upon the activity that generated the income or expense. Litigation

settlements are one example of an area requiring judgment since they may be classified as operating or nonoperating depending on the nature of the litigation.

53

SLIDE 54

General Reporting Requirements General Reporting Requirements

Registration Statements Registration Statements -

Rule 8

Rule 8-

08 of Regulation S

08 of Regulation S-

Financial Statements must be current as of the date of the filin Financial Statements must be current as of the date of the filing g Financial statements must be as of a date less than 135 days t Financial statements must be as of a date less than 135 days to be declared effective be declared effective If the smaller reporting companies effective date falls after 4 If the smaller reporting companies effective date falls after 45 days but with days but within 90 days s of the fiscal y cal year end, audite udited financia ncia

f the fis

d fina l l in 90 day ear end, a statements are not required provided the following: statements are not required provided the following: If a reporting company, reporting company, all reports must have been file eports must have been filed If a all r Company expects to report income from contin Co uing mpany expects to report income from continuing

perations before taxes for the current year
perations before taxes for the current year

Company has reported income from continuing o Com p pany has reported income from continuing operatio

erati ns before taxes in at least one of the two previous years before taxes in at least one of the two previous years

It is important that registrants are mindful of the requirements pertaining to the age

f financial statements in a registration statement. Updating financial statements

can be time consuming and may slow down a registered transaction considerably if the company does not plan for it appropriately. 54

SLIDE 55

Disclosure Controls and Procedures Disclosure Controls and Procedures

Item 307 of Regulation S Item 307 of Regulation S-

K Disclosure controls and procedures means controls and Disclosure controls and procedures means controls and

ther procedures of an issuer that are designed to ensure
ther procedures of an issuer that are designed to ensure

that information required to be disclosed by the issuer in that information required to be disclosed by the issuer in the reports that it files or submits under the Act is the reports that it files or submits under the Act is recorded, processed, summarized and reported, within the recorded, processed, summarized and reported, within the time periods specified in the Commission time periods specified in the Commission’ ’s rules and s rules and

forms. Disclosure controls and procedures include,
forms. Disclosure controls and procedures include,

without limitation, controls and procedures designed t without limitation, controls and procedures designed to ensure that information required to be disclosed by an ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's accumulated and communicated to the issuer's management, including its principal executive and management, including its principal executive and principal financial officers, or persons performing simila principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions functions, as appropriate to allow timely decisions regarding required disclosure. regarding required disclosure.

55

SLIDE 56

Common DC&P Comment Areas Common DC&P Comment Areas

Insufficient conclusions

Disclosure should state DC&P conclusion in Disclosure should state DC&P con clear and clusion in clear and unqualified language unqualified language – – effective or not effective effective or not effective “ “Adequate Adequate” ” or

r “

“Effective except for Effective except for…” …” are inappropriate are inappropriate

Incomplete definition of DC&P

If definition is included, should conform exactly to Item If 307 definition is included, should conform exactly to Item 307

f Regulation S
f Regulation S-
K

K However, definition is not Ho required wever, definition is not required

“Reasonable assurance” language

Disclosures regarding design and conclusion on Disclosures regarding DC&P design and conclusion on DC&P should be consistent with conclusion should be consistent with conclusion

The staff continues to issue comments on the evaluation disclosure controls and procedures in quarterly and annual reporting. Item 307 of Regulation SK requires companies to clearly disclose whether disclosure controls and procedures are effective or ineffective. Registrants should be aware that the definition of disclosure controls and procedures is more broad than internal control over financial reporting so it is possible that disclosure controls and procedures can be ineffective even while internal control over financial reporting is effective. 56

SEC Staff Review of Common Financial Reporting Issues Facing Smaller Issuers

Agenda Agenda

 Overview

Overview

 Recent Developm

Recent Develop ents ments

 The Comment Letter Process

The Comment Letter Process

 Financial Reporting Issues Frequently

Financial Reporting Issues Frequently Raised in Comment Letters Raised in Comment Letters

 Management

Management’ ’s Report on Internal s Report on Internal Control over Financial Reporting* Control over Financial Reporting*

 Resources

Resources

* Forums held in Chicago and Philadelphia in September and October, respectively included a second day attended only by directors and financial executives of smaller public companies. The slides covering management’s report on internal control

participants. 2

Disclaimer Disclaimer

3

Overview Overview

4

Overview Overview

Divisions and Offices Divisions and Offices

5

Division of Corporation Finance Division of Corporation Finance (DCF) (DCF)

Organization Organization

Division of Corporation Finance Division of Corporation Finance (DCF) (DCF)

DCF DCF – – Chief Accountant Chief Accountant’ ’s Office s Office

Provides technical support to industry groups

Pre-filing submissions

Rulemaking impacting financial reporting

8

Office of the Chief Accountant Office of the Chief Accountant

The Chief Accountant is principal adviser to the Commission on accounting and auditing

responsibility under the securities laws to establish accounting principles, and for

Recent Developments Recent Developments

10

Smaller Reporting Company Relief Smaller Reporting Company Relief and Simplification and Simplification

Effective date -- February 4, 2008 The reasons for the change are:

Expand eligibility to use scaled disclosure Reduce unnecessary complexity by aligning the

categories of “small business issuers” and “non- accelerated filers”

Simplify disclosure requirements by including

scaled disclosure requirements in Regulations S- K and S-X

Does not change the level of disclosure required in most cases

From the Small Entity Compliance Guide: The SEC has adopted a new system of disclosure rules for smaller companies filing periodic reports and registration statements. The new rules are effective February 4,

companies will refer to the special paragraphs labeled “smaller reporting companies” in Regulation S­K. 11

Smaller Reporting Company Relief Smaller Reporting Company Relief and Simplification and Simplification

Key Changes

 New Threshold -- $75 million in public float

 “A la Carte” Disclosures  Financial statement requirements

 Eliminates use of SB forms

For the most part, the new rules did not change any existing requirements for smaller reporting companies. The only notable changes are as follows:

in addition to the interim balance sheet.

results of operations. Smaller reporting companies may choose to comply with scaled or non­scaled financial and non­financial item requirements on an item­by­item basis in any one

Smaller Reporting Company Relief Smaller Reporting Company Relief and Simplification and Simplification

Where can I find more information?

This slide provides links to the final rule release (no. 33­8876) on the SEC’s

reporting companies adopt the new rules and a list of Compliance and Disclosure Interpretations addressed by the Office of Small Business Policy related to the new rule. 13

Other SEC Key Developments Other SEC Key Developments

 Sarbanes-Oxley  Internal Control Over Financial Reporting in

Exchange Act Periodic Reports of Non- Accelerated Filers (Release 33-8934)

Delays Section 404(b) requirement until

fiscal years ending after 12/15/09

 Costs and Benefits Study of Sarbanes-Oxley

Act Section 404 (Press Release 2008-8)

International Financial Reporting Standards eXtensible Business Reporting Language

(XBRL)

Committee on Improvements to Financial

Reporting recommendations (CIFiR)

Key US GAAP Developments Key US GAAP Developments

The Comment Letter Process The Comment Letter Process

16

Comment Letter Process Comment Letter Process

Filings Subject to Staff Review Filings Subject to Staff Review

 Selected by the SEC

Selected by the SEC’ ’s confidential internal s confidential internal screening criteria and Sarbanes screening criteria and Sarbanes-

Oxley requirements requirements

 IPOs

IPOs

 Other registration statements

Other registration statements

Overview

Recent Developm

The Comment Letter Process

Financial Reporting Issues Frequently

Management

Resources

Expand eligibility to use scaled disclosure Reduce unnecessary complexity by aligning the

Simplify disclosure requirements by including

companies will refer to the special paragraphs labeled “smaller reporting companies” in Regulation SK. 11

New Threshold -- $75 million in public float

“A la Carte” Disclosures Financial statement requirements

Eliminates use of SB forms

results of operations. Smaller reporting companies may choose to comply with scaled or nonscaled financial and nonfinancial item requirements on an itembyitem basis in any one

This slide provides links to the final rule release (no. 338876) on the SEC’s

Sarbanes-Oxley Internal Control Over Financial Reporting in

Delays Section 404(b) requirement until

Costs and Benefits Study of Sarbanes-Oxley

International Financial Reporting Standards eXtensible Business Reporting Language

Committee on Improvements to Financial

Selected by the SEC

IPOs

Other registration statements

Annual reports

Proxy statements

Item 4.01 and Item 4.02 Form 8

As required by the SarbanesOxley Act of 2002, the Division undertakes some level

Request for additional supplemental

Provide additional or different disclosure in a

Amend filing to revise financial statements or

No further comments letter

Policy disclosures (i.e., SAB 104) Policy disclosures (i.e., SAB 104) “ “Boilerplate Boilerplate” ” disclosures disclosures Disclosure should be specific to company Disclosure should be specific to company’ ’s s revenue streams revenue streams EITF 00 EITF 00-

Element Arrangements EITF 99 EITF 99-